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By XE Market Analysis October 28, 2016 7:55 am
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    XE Market Analysis: North America - Oct 28, 2016

    The dollar struggled for direction, overall, with EUR-USD remaining rooted to the 1.0900 level, despite net encouraging data of the Eurozone, and with USD-JPY settling back to near net unchanged levels after edging out a fresh three-month peak at 105.42. Japanese data today were mixed. Core national CPI came in unchanged at -0.5% y/y in the September reading, as expected. The BoJ is expected to acknowledge after its policy meeting next week that CPI won't reach the 2.0% target before 2018 while downwardly revising inflation projections. The central bank is not expected to ease policy further until the new year. The inflation data today highlighted that tepid consumption is a driving factor holding down prices, despite unemployment data dropping to 3.0% from 3.1%, with the job-to-applicant ratio rising to its best since August 1991. Elsewhere, sterling came under pressure during the late London AM session, reportedly linked to monthly Bundesbank operations.

    [EUR, USD]
    The bullish case for the euro has continued to build. EUR-USD has has now made four successive higher closing levels on the daily chart, which along with a tallying decline in downside momentum indicators suggests the pairing has established a base after a three-week bear phase. Further mean reversion would bring the 1.1000 into play, just below which the 20-day moving average is presently situated. Eurozone data today has had limited impact, with warmer than expected German state inflation imparting a modest, but short lived bid on the euro, while an encouraging broad-based improvement in the Eurozone ESI confidence survey didn't cast any noticeable impact. While expectations for a December Fed rate hike haven't fully cemented (Fed funds were yesterday indicating about a 70% probability for a 25 bp tightening) data out of the Eurozone this week so far have been net encouraging, particularly the October Ifo business sentiment survey and PMI readings out of Germany.

    [USD, JPY]
    USD-JPY rallied to a fresh three-month peak at 105.42 concomitantly with a spike in U.S. Treasury yields and widening yield spread versus JGBs. EUR-JPY managed to edge out a two-week peak, while AUD-JPY has remained below the three-month high seen earlier in the week. The weaker yen fuelled Japanese stock market outperformance, with the Nikkei 225 closing with a 0.7% while most Asian bourses posted losses. Japanese data today were mixed. Core national CPI came in unchanged at -0.5% y/y in the September reading, as expected. The BoJ is expected to acknowledge after its policy meeting next week that CPI won't reach the 2.0% target before 2018 while downwardly revising inflation projections. The central bank is not expected to ease policy further until the new year. The inflation data today highlighted that tepid consumption is a driving factor holding down prices, despite unemployment data dropping to 3.0% from 3.1%, with the job-to-applicant ratio rising to its best since August 1991. We expect USD-JPY to remain broadly underpinned, with expectations for a December Fed rate hike seen cementing over the coming weeks while markets continue to entertain expectations for the BoJ to increase stimulus in 2017. The 20- and 50-day moving averages are at 103.99 and 102.81, respectively. The July peak at 107.49 provides an upside waypoint.

    [GBP, USD]
    Sterling was showing an average loss of 0.3% versus the G3 currencies, as of the early European PM session. EUR-GBP gains drove the pound lower, with the cross showing a 0.5% gain, pushing Her Majesty's currency to an eight-day low versus the euro. The talk on social media was that it may be usual Bundesbank operations as monthly UK membership payments to the EU were put through. Cable logged a three-session low at 1.2123. The good news stories of yesterday (solid Q3 growth data, strong retail sales, news that Nissan will remain committed to manufacturing cars in Brexit Britain) had little last impacting on the pound. Today's Gfk consumer confidence survey for October ebbed to a reading of -3, down from -1 in September, on rising concerns consumers are starting feel about the inflationary consequences of the lower pound. Sterling is down by an average 4.3% versus the G3 currencies month-on-month.

    [USD, CHF]
    EUR-CHF has found a floor after probing briefly below 1.0800 earlier in the week. Some think the 1.0800 level is the point at which the SNB intervenes. SNB's VP Zurbruegg said this week that "we don't have a fixed limit for growing the balance sheet" as it's a corollary of our foreign exchange market interventions". Swiss sight deposits have increased by 10.8% since the start of the year. After seeing a one-year low at 1.0623 on June 24, in the immediate wake of the UK's vote to leave the European Union, EUR-CHF looks to have settled, albeit with some chop and occasional SNB assistance, in an orbit centred around 1.0800-1.0900. More of the same looks likely.

    [USD, CAD]
    USD-CAD clocked a seven-month high at 1.3407 yesterday, since settling to the upper 1.33s. The pair has been on a bull run since last week's BoC post-meeting statement said it "had actively discussed the possibility" of easing monetary policy further." This was backed up by remarks from BoC Governor Poloz on Monday. We remain bullish, expecting that the case for a Fed tightening in December will cement in the coming weeks, contrasting the BoC policy stance. A retreat in oil prices as Opec show signs of failing to fully implement production cuts should also keep the Loonie under the cost. USD-CAD support is at 1.3333-35.

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